FTC Testifies on New Entry into Hospital Competition

Competition Can Help Make Health Care More Affordable, But Cannot Transfer Resources to Those Who Do Not Have Them

Federal Trade Commission Principal Deputy General Counsel John Graubert today presented the Commission’s testimony on new entry into hospital competition before the U.S. Senate’s Subcommittee on Financial Management, Government Information, and International Security of the Committee on Homeland Security and Governmental Affairs. The testimony focused on the effects of entry by single-specialty hospitals.

Graubert prefaced his testimony by describing the Commission’s experience in the area of health care competition, specifically citing the FTC’s recent report, issued jointly with the U.S. Department of Justice (DOJ), entitled “Improving Health Care: A Dose of Competition.” The report, which was released in July 2004, examined the state of the health care marketplace in the United States and the role of competition, antitrust, and consumer protection in satisfying Americans’ preference for a high-quality, cost-effective health care system. It was the result of 27 days of joint hearings that took place between February and October 2003.

He continued by defining three main points the FTC considers essential in its examination of new entry into hospital competition: 1) vigorous competition can have important benefits in the hospital arena, just as it has in the multitude of markets in the U.S. economy that rely on competition to maximize consumer welfare; 2) when new firms threaten to enter a market, incumbent firms may seek to deter or prevent that new competition. Such conduct is by no means unique to health care markets; it is a typical reaction of incumbents to possible new competitors; and 3) policymakers must consider the extent to which regulatory distortions may affect competition among hospitals and other firms. For example, although entry by single-specialty hospitals and ambulatory surgical centers has provided consumer benefits, Medicare’s administered pricing system has substantially driven the emergence of such hospitals and centers.

Next, Graubert presented a general overview of the new types of firms that are now entering to compete with hospitals, from single-specialty hospital (such as those focusing only on pediatrics) to ambulatory surgery centers. He then described the Certificates of Need Program, including responses by incumbent hospitals to proposed entry by single-specialty hospitals.

Finally, he addressed cross-subsidization and the influence of government purchasing on the development of competition in the hospital arena, stating that Medicare’s administered pricing system has encouraged the entry of single-specialty hospitals and ambulatory surgical centers. He testified that both types of entities tend to compete away the profits that general hospitals use to cross-subsidize unprofitable care. Cross-subsidization and competition are at odds, he said, and reliance on cross-subsidies (as opposed to direct subsidies) to ensure access to health care makes the availability of such care contingent on the location in which care is provided, the wealth and insurance status of those receiving care, and the uncompetitiveness of the market for hospital services.

Concluding the testimony, Graubert said, “Competition can help make health care more affordable, but it cannot transfer resources to those who do not have them . . . Competition has a number of effects on hospitals, including the potential to improve quality and lower costs. Competition will also undermine the ability of hospitals to engage in cross-subsidization, however.” Citing the FTC/DOJ report, he said that “government should re-examine the role of subsidies in health care markets in light of their inefficiencies and potential to distort competition.”

The FTC vote to approve the testimony and place a copy on the public record was 5-0. The written statement presented at the hearing represents the views of the FTC.

Copies of the testimony can be found on the FTC’s Web site. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.